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The latest happenings in the Melbourne property market. For our Essays and The Secret Agent Report, see our Research page.


The Secret Agent Report – True Capital Growth

We have just released our latest Secret Agent report!

Averages are frequently relied upon to determine key indicators such as capital growth. While an average may be a quick and easy metric to measure a data set, it can also produce very misleading results. This is especially true when looking at the capital growth of a suburb. Changes in average property prices and actual capital growth are not the same thing. There are many factors that determine the price of a house and the average growth in property values. Using more reliable methods, Secret Agent uncovers the true capital growth of suburbs across inner Melbourne.

Start reading this report by clicking on the link below:

Register to receive our report monthly and access the True Capital Growth report now!

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Deflation and Commercial Property

For the first time since December 2008 in Australia, consumer prices have fallen. According to the ABS, the March 2016 quarter saw the consumer price index fall by 0.2%. This is big news.

Whether the deflation numbers are noise or signal, it’s hard to say just yet. However, it poses an interesting question: what would be the impact on the Australian property market if deflation were to creep further into our economy? Secret Agent intends to cover this a little further over the coming month, but for today, let’s look at the impact on commercial property.

Commercial property is a much desired asset for investors. The allure of a lease that guarantees the investor a return over a period of time is highly attractive, especially in a world of low returns. Rent increases every year are a common component of leases and either a fixed percentage increase or CPI measure is used. This begs the question; what happens if we continue to move into deflationary conditions?

While most new leases use a fixed percentage increase, some leases are still using CPI as the rate of increase. Also, many older leases that are still current operate on a CPI basis. We may start to see leases that produce rent decreases for tenants annually and erode the value of some buildings, especially where long leases and terms have been secured by tenants.

The current reality is that negative bond yields are being acquired globally. A world with deflation could mean future tenants secure a fixed rate of decrease over the term of the lease, or negotiate hard for CPI-only leases.

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Lessons from Jan Gehl

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For the fifth consecutive year, Melbourne has been named the world’s most liveable city by The Economist Intelligence Unit’s annual survey. While the ranking is based on a range of factors such as healthcare, culture, education and infrastructure, Secret Agent believes that Melbourne’s success is due to thoughtful urban design.

We owe it to Jan Gehl, the Danish architect and urban designer who worked together with Melbourne City Council in the early 1990s to transform the city from, in his own words, “neutron-bombed, not a soul – not even a cat”, into a place for people. Much of our laneway culture and outdoor dining today can be attributed to Gehl’s visionary thinking and humanistic approach to urban design.

Three main principles can be drawn from Gehl’s work:

1. Design the city at 5km/h

Cities had always been designed for people, who move at a modest speed of about 5km/h, up until the boom of the automobile in the 1960s. New cities were then designed at 60km/h – wider, further apart, less accessible by foot. Gehl’s intervention in Melbourne applied the human scale of the older, 5km/h cities, giving birth to our laneway culture that is now inseparable from the city’s identity. Narrow, dense and brimming with life, there is a certain magic that comes with compact spaces.

Thanks to Gehl and planning changes, Melbourne CBD has gained 20 hectares of footpaths over 15 years. Designing walkable urban spaces encourages people to do so, resulting in a healthier population. Think about how far a person has to walk to get from A to B; is it a comfortable distance? If it necessarily becomes a lengthy walk, can it be a safe, pleasant and eventful journey?

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Bond Yield Update: April

Yields down since last month and almost back to levels in April 2015

As part of our continued series on interest rates, Secret Agent has been tracking movements in the bond yield curve since late last year. If you don’t know why bond yields are so important for property investors, download our yield curve report.

So far this month, short, medium and long term treasury bond yields are down by between 0.06% for 90 day bills and 0.16% for 10 year bonds. This is shown below.

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Why You Can’t Trust Averages

Changes in average prices are frequently used by commentators to draw conclusions about the property market. Our recent post on Fitzroy’s true capital growth gave some insight into why statistics like averages and medians are not sufficient to make judgements on property value in a given suburb.

To find true growth in value, many factors including property size, location and renovation levels need to be accounted for. This can be done by observing resales of the same property over time, given no structural changes have occurred between sales. When we compare the annual average price changes (reported) and our own index based on resales only, we start to see that capital gains are mostly exaggerated using averages alone.

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Record Breaking Building Permits in Victoria

You might have walked the streets many times over the past 12 months and noticed the substantial number of construction sites and cranes in air throughout Victoria.

The Victorian Building Authority (VBA) has released its latest findings on reported building permits and the total value of building reported in 2015. In summary, this is what they found.

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Noise: A Summary

One of the effects of urbanisation is an increasing number of people choosing to live in the inner city, particularly in high density neighbourhoods. Re-zoning has allowed many residential areas to become mixed use zones whereby apartment high rises, houses and restaurant strips exist all on the same street. In Victoria, these zones are often centred around transport hubs, nearby either tram lines or train stations. All these elements make the hustle and bustle of the city, but one might argue it’s getting a little too noisy. External noise has become a modern day pollutant that is difficult to escape, and has captured our attention.

In our Healthy Environments report, we recommended buying property that is not located on a main road or nearby train stations to avoid high levels of external noise while at home. Noise can have detrimental health effects such as cardiovascular disease, even if you think you’ve become accustomed to the low grumblings of traffic and passing trains.

We recently discovered that, in addition to poor health outcomes, external noise can negatively impact the value of property. These are some of our findings.

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The Secret Agent Report – The Yield Curve

We have just released our latest Secret Agent report!

When deciding to invest in the property market, most of us will first obtain approval for a loan, find a suitable property to buy and then pay off the mortgage accordingly, dealing with any rate rises as they come. It can be that simple. A more clever way to invest would be to consider how mortgage rates are likely to change in the near future, prior to making the decision to purchase. This is where the yield curve plays an important part in making general predictions about future mortgage rates.

Start reading this report by clicking on the link below:

Register to receive our report monthly and access the Yield Curve report now!

The Yield Curve Report


Fitzroy’s True Growth

Between January 2011 and December 2015, 512 houses and townhouses were bought and sold in Fitzroy. If we compare the average prices in 2011 and 2015, these have increased by about 9.4% per year. That’s the only thing this tells us: people spent more money on each house in 2015 than they did in 2011.

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As a statistic, averages can be very misleading. They ignore any changes to the mix of properties being put on the market. For example, each time a property is refurbished, extended or renovated, the value of the property increases. While this increase in value is reflected in an increased average price, this is not true capital growth, as additional investments had to be made. Also, with only about 100 properties being sold each year, the sale of a very few, very large houses would have a significant impact on the average price in that period.

If we break this down into individual years, we can see that average prices fluctuate, which again shows us the limitation of using averages as indicators of capital growth.

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Yield Curve and RBA Cash Rate

Bond yields provide a reliable way to make predictions about monetary policy. This week’s bulletin explores why this is the case.

What is a yield curve?

A yield curve is made by plotting the interest rates of bonds against their maturity dates. A normal yield curve occurs when long-term rates are higher than short-term rates. This is important for an economy’s liquidity, as banks can make a profit by borrowing at the (lower) short-term rates and lending at (higher) long-term rates.

What is a cash rate?

When banks borrow funds from each other in the overnight market, they can charge a special interest rate set by the Reserve Bank of Australia. This is known as the cash rate.

Let’s look at the current yield curve on Australian Treasury bonds with maturities between 90 days and 10 years (above). Parts of the yield curve are inverted (pointing downwards), meaning short-term rates (90 days) are higher than some long-term rates (2, 3 and 5 years). This creates a disincentive for banks to lend and if the entire curve is inverted, it can lead to a “credit crunch”. This happened in the US during the global financial crisis, when money suddenly dried up because banks could no longer profit from lending out money.

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